Ambry Genetics faces an important test

In 1999, Charles Dunlop passed up graduate school to launch a genetic testing company. He was acting on the advice of his father, who had told him, “The money is now.” It was indeed a year of easy money for most any tech company. In short order, by pitching his idea to friends and family, Dunlop raised enough to get started.

He installed his fledgling company, Ambry Genetics, on the second floor of a commercial building in Costa Mesa. It was across the courtyard from Condom Revolution, a sex shop, and directly above a Harley-Davidson shop. Rough-looking bikers would congregate below and smoke cigarettes, sometimes scaring off the clients of Dunlop's rather incongruous business.

Ambry's first test was for cystic fibrosis, a life-threatening lung disease. To spread the word about his new business, Dunlop and his brother offered physicians one free test. The next day, patient samples started pouring in.

“I realized that if I could get those samples in and out of the lab, I'd have a profitable business,” Dunlop recalled.

Today, he says he's achieved that goal. What he couldn't have suspected was that the company would become a central player in a legal battle spawned by a landmark U.S. Supreme Court ruling.

From its humble beginnings, Ambry – named after Dunlop's family dog – has grown to some 200 employees who now occupy a glistening state-of-the-art building in a high-tech industrial park in Aliso Viejo. The company conducts about 300 genetic tests for a wide range of diseases, including several cancers. It also offers a $15,000 test that can discover rare genetic diseases by analyzing all 20,000 genes in a patient's genome, comparing them to known mutations and to the DNA of family members.

During a recent interview, Dunlop declined to discuss the financials of Ambry, which is privately held, except to say that it has been profitable since 2002, he and his family have a majority stake in it, and employees own about 10 percent to 15 percent.

Dunlop, sporting a short-sleeve blue polo shirt, beige shorts and flip-flops, projected an image of insouciance more befitting a surfer than a chief executive. Among expressions like “awesome,” “gnarly” and “pretty rad,” however, he displayed a keen grasp of the elusive scientific concepts at the heart of his business.

He also acknowledged he was under pressure following a recent high court ruling that roiled the world of commercial genomics and gave a huge boost to Ambry's prospects, now threatened by a countervailing lawsuit.

The court's unanimous June 13 decision outlawing patents on human DNA ended a monopoly enjoyed for two decades by Utah-based Myriad Genetics on two genes known as BRCA1 and BRCA2. The genes, when mutated, are predictors of an elevated risk for breast cancer, and they are the basis for a test frequently administered to women worried about having a propensity for the disease.

Ambry wasted no time after the ruling, quickly announcing it would incorporate the BRCA genes into its breast-cancer test and would charge little more than half of what Myriad did. Other companies followed suit, undercutting Myriad by even more.

Myriad has built its business largely on the exclusivity of the BRCA tests, which account for about 80 percent of its nearly $600 million in annual revenue. No wonder the Salt Lake City company, with a market capitalization of $2.5 billion, is now suing Ambry and another testing lab, Houston-based
Gene By Gene.

Myriad argues Ambry is infringing on 10 patents that were not invalidated by the Supreme Court. They cover both synthetic DNA and methods of testing, which the nine justices said could still be patented.

“We believe we have a strong case,” Myriad spokesman Ronald Rogers said. The company is seeking a court order that would prohibit Ambry and Gene By Gene – and possibly several others not named in the suit – from selling BRCA tests.

Dunlop says Ambry does not use synthetic DNA “in any of its diagnostic offerings, including BRCA1 and BRCA2,” and therefore it is not violating any patents that cover it. With regard to Myriad's patent rights on testing methods, the Ambry chief points to the opinions of some observers who say the Utah company is inappropriately claiming ownership of conventional laboratory techniques and that its claims are functionally equivalent to patents on the genes themselves.

Financial analysts who follow the genomic industry are split about the strength of Myriad's case.

“Given (its) significant balance sheet and the validity of existing patents around the various (synthetic) DNA and method-based claims, we believe Myriad has the dry powder and legal standing to aggressively pursue any competitor infringing on their intellectual property,” wrote Drew Jones, an analyst at Stephens Inc. in Little Rock, Ark.

Brandon Couillard, a senior equities analyst at Jefferies LLC, said, “It sounds like Myriad has a case, but it is unclear how strong it is or how enforceable it is.” He said the Utah company is probably going after Ambry and Gene By Gene to try “to scare others in this space from similar tactics.”

For many companies, “Ambry included, this would be a significant opportunity in an area that is one of the most popular diagnostic tests out there,” Couillard said.

That explains Dunlop's anxiety about the Myriad lawsuit, which is clearly a threat to the kind of triple-digit growth the high court ruling has put so tantalizingly within reach.

He projects the addition of the BRCA to Ambry's testing menu will eventually double the company's revenue. It is already gearing up to accommodate the expected growth, with plans to add 50 employees by mid-August.

In Dunlop's view, the implications of Myriad's case far transcend the mere specifics of BRCA testing. If Myriad wins the case, he said, “It would effectively limit the reach of the Supreme Court's decision.” And that, he said, would stifle innovation.

“To be the best lab scientists we can be, we need to be able to operate freely and go after the genes we think are most applicable to diseases,” Dunlop said. “If we are constantly looking over our shoulder wondering what genes are patented, we'll never be able to move forward.”

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